How can donors with foundations make a tax-advantaged gift to a foreign NGO that is not designated as a U.S. 501(c)(3)? And how can donors be assured that their donation is used appropriately?
The IRS provides U.S. grantmakers with two different options:
1. Conducting an equivalency determination (ED)
2. Exercising expenditure responsibility (ER)
While both options provide grantmakers with the ability to fund non-exempt entities, there are situations where one may be more useful than the other.
Deciding Between Equivalency Determination or Expenditure Responsibility
A private foundation may choose to use either equivalency determination or expenditure responsibility. Both tools are equally valid options for making a grant to a non-exempt entity, but have strengths and weaknesses that lead to one or the other being better options on a case-by-case basis.
Equivalency determination can be an attractive option for grantmakers when they most value flexible reporting procedures. Additionally, ED is ideal for grantmakers who plan to make unrestricted grants or fund the purchase of capital assets or an endowment, since the ER reporting requirements could be indefinite for such expenditures, causing major administrative burdens most funders (and grantees) would seek to avoid.
For many foreign NGOs, however, the extensive documentation, operational criteria, and financial standards required of ED will often hinder their ability to acquire a certificate. Expenditure responsibility is more cost effective, offers foreign NGOs more flexibility in submitting historical and governing documents, and provides grantmakers with regular oversight through the annual reporting schedule. It also offers the ability to work with small grassroots NGOs or other types of organizations that may not pass an ED.
Whether a private foundation opts for ED or ER should be contingent upon the totality of circumstances that define the relationship with its grantee and the project that they would like to support. There is no right way to make global grants, but understanding the available options can help donors make the best choices for both themselves and their grantees, and ensure their gifts will be safe, secure, and tax effective.
Blending ED and ER: CAF America’s Enhanced Expenditure Responsibility
To provide additional assurance on the safety of its grants, some providers such as CAF America, a leader in global grantmaking, offer a service that is a hybrid of both ED and ER. “Enhanced Expenditure Responsibility” combines a heightened internal due diligence that resembles that of ED with the flexibility offered by traditional ER. Foreign NGOs that have been approved through CAF America’s Enhanced ER remain eligible to receive tax-advantaged gifts for a period of 1–3 years. Such an approach highlights the fact that every philanthropic vision is unique, and each giving strategy should be forged in a way that addresses that uniqueness.
Contact info@cafamerica.org today to learn how we can facilitate your giving via ED or ER.